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Jim, read this

Bank failures.

Happen all the time. Shareholders lose their money, managers get fired, insured depositors don’t lose their money, uninsured do. No public money used in “rescues” either. All paid for from the insurance fees paid by the banks on insured deposits.

Hell of a system.

24 thoughts on “Jim, read this”

  1. As I don’t pay for the privilege of reading the whinings of a bunch of Remoaners, I can’t……

  2. Actually by googling the article I’ve managed to read it for free.

    “Shareholders lose their money, managers get fired, insured depositors don’t lose their money, uninsured do. No public money used in “rescues” either. All paid for from the insurance fees paid by the banks on insured deposits.”

    But thats not what happened this time is it? Because when the rich and well connected were at risk in SVB et al the taxpayer just ponied up the cash to make sure all depositors, insured and uninsured, got made whole.

    I too would call it a hell of a system, but for a completely different definition of hell to yours. Why should a Silicon Valley type with tens of millions be made whole at public expense, while a small business with a few hundred K of lifetime savings in ABC Bank Nowheresville takes a haircut?

    My system would be fair. Want 100% safety, you can have it. Want returns, you can have them too, but at your own risk, of 100% of your capital. Everyone is equal, whether you have $1 or $100m, and regardless of whether you are the President or the lowliest of the low.

  3. I think a system where the depositors get their money back and the share/bond holders get nothing, plus the management team getting the arse is exactly as it should be.

  4. “I think a system where the depositors get their money back and the share/bond holders get nothing, plus the management team getting the arse is exactly as it should be.”

    Well it can’t be like that under FRB. When a bank goes bust its because the money is no longer there. The management have done something stupid with it, or been unlucky, either way there isn’t enough cash to make the depositors whole. Ergo someone else has to pay to repay the depositors in full, which usually ends up being either other bank shareholders (via the insurance premiums banks have to pay into the deposit guarantee scheme) or the taxpayer, if the whole banking system is in danger. Thats whats so immoral about a fractional reserve banking system, it always is backstopped by someone else, who doesn’t get a say in the matter in the case of the taxpayers.

  5. Jim. There’s nothing inherently precarious about FRB. In the normal course 100% of depositors aren’t going to withdraw at the same time so 100% reserves aren’t necessary. What’s important is the fraction & CONFIDENCE (Shame there not a 64 point bold, underlined, colour red font capability here)
    There’s definitely a problem around obscurity & expectations. For instance people expect both cheap/free banking plus security. You can’t have both. Looking after people’s money costs. It’s a service. If the customer doesn’t want to pay for it, the bank has to cover it somehow.

  6. Don’t suppose this occurs to someone like you. Accustomed to effectively free banking & bitching about what charges are made. I pay three monthly for my current account & another fee for having a debit card. I made a 10k transfer, couple of weeks ago. From one of my accounts to another. Cost me about 80€.

  7. I’m actually concerned, at the moment, about where some of my money is lodged. I’ve been using a currency exchange & transfer system to hold a balance. So not exactly a bank because they make their living out of currency exchange fees. But now they’ve started paying me interest on the deposits. At one point I was paying for them to hold euro deposits. (Neg interest rates) So immediately I wonder where they’re earning the money to do that? They say it’s in government securities. Mmmm…. Which government(s)?

  8. “. There’s nothing inherently precarious about FRB. In the normal course 100% of depositors aren’t going to withdraw at the same time so 100% reserves aren’t necessary. ”

    Except as our hosts link shows, bank failures are in inherent feature of a FRB system. They ARE normal.

    Don’t forget we are only 50 years into a fully global fiat money system. Prior to that FRBs were more constrained in their activities by the gold standard. And in the last 50 years we have had 4 systemic banking crises – UK 1973-5, Japan 1990 onwards, GFC 2007-9 and today. I would not call that a stable system.

  9. The problem isn’t FRB, it’s the cavalier behaviour of the casino share bankers/traders.
    If they ran like small savings and loan banks, there wouldn’t be much of an issue. Loan default rates are predictable to a reasonable extent so bank costs can be covered.
    The problem comes from taking depositors money and using it in massively leveraged CDS positions and similar short selling etc. Then their bet goes wrong, and the bank goes bust, leaving the depositors and taxpayers to pick up the pieces.

    Simple solution, high street banks run like savings and loan banks. Casino trading banks run as separate entities, though public can buy in if they want, get better returns but at risk.

  10. The proper solution isn’t to muck around with a myriad of rules which can be circumvented or which create perverse incentives for the banks. It is to hold those who fuck up accountable.

    One feature notably absent from the last round of bank failures were the scores of bankers dangling from piano wire.

    Instead, they circle the wagons, hit up their mates in the media and Government for cover, and sail off into the sunset whilst pocketing a golden goodbye.

    I’m not against FRB in the same way that Jim is, I recognise why it’s a thing. But for it to work, Capitalism has to work – those who fail must be punished. As it currently stands, far too many Boardrooms are only too happy to take excessive risks, knowing that they can pocket the upside and let the taxpayer pick up the pieces if it all goes wrong.

  11. What’s to stop BoE having a great stash of physical notes (a proxy for “gold”) that can be given to banks at any time (for a rate/fee).

    For example: Bank A (ultra simplistic)
    Mortgages 100
    Deposits -90
    Equity/capital -10

    The Joes all get scared and walk in and ask for cash. Following which:

    Mortgages 100
    BoE -90
    Equity -10

    This is expensive for Bank A (BoE charge a whole lot more than the bank paid Joe as interest if anything…)

    Joe thinks “Oh, my money is safe after all”, and puts the cash straight bank into the bank, bank gives notes back to BoE, job done?

    Scale and similar stuff is just a technicality. Once Joe knows that Bank A can get all the physical cash it needs from BoE (if needed), that’s confidence all by itself. It’s not an ongoing working (P&L) day-to-day model for the bank because the fee from BoE would prohibit that (substantially reduces the maturity transformation margin), but doesn’t that solve the FR confidence / cash available / bank run issue specifically?

    A variation of BoE covering intra bank loans (as intermediary) where banks lose confidence in each other?

  12. This is what is done. As long as the bank is solvent then the BoE will provide unlimited liquidity. At an interest rate and will make a profit from it.

  13. Don’t forget we are only 50 years into a fully global fiat money system. Prior to that FRBs were more constrained in their activities by the gold standard.

    The gold standard was a global fiat money system.

    And in the last 50 years we have had 4 systemic banking crises – UK 1973-5, Japan 1990 onwards, GFC 2007-9 and today. I would not call that a stable system.

    It has never been particularly stable, gold or no.
    https://en.wikipedia.org/wiki/List_of_banking_crises

    A couple of observations –
    the world is a lot richer under the current arrangements
    consequences for ordinary people are less catastrophic under the current arrangements

    So far of course; prior performance is no guarantee of future results.

  14. “This is what is done. As long as the bank is solvent then the BoE will provide unlimited liquidity. At an interest rate and will make a profit from it.”

    OK. Then I’m entirely struggling to see what the problem of FRB is. The important thing for the bank being profitability rather than a “cash” run (liquidity). If its loan book is good, and its capital ratio & P&L reserves adequate, then that should be sufficient even if in extremis it has to shrink its activities (both gross assets and liabilities) and overhead should punters for whatever reason start to prefer Bank B (electronically) for their deposits, or under the mattress instead.

  15. Then I’m entirely struggling to see what the problem of FRB is. The important thing for the bank being profitability

    If I understand Jim’s position correctly, the problem is when banks take the “profitability” directive too far and begin to consider themselves Masters of the Financial Universe with ever-crazier financial engineering which will of course never come crashing down.

    And when it does come crashing down it’s eventually the small depositors that suddenly can’t pay their bills from their current accounts, and the taxpayers picking up the costs with those Masters riding off into the sunset with their ill-gotten gains intact.

    If depositors could (or should, whatever the details) keep their day-to-day cash in a secure, boring, 100% reserve bank, presumably for a small service charge, then the Masters could do what they want with the investment cash from sophisticated investors pushing out along the risk curve for a better return – without, importantly, any need of taxpayer guarantees.

  16. Zero Hedge quotes The Sage.

    Buffett faulted the executives in charge of the failed banks, arguing they should be held accountable for mistakes that were hiding in “plain sight.” He also called out “messed up” incentives in banking regulation, as well as poor messaging by regulators, politicians and the press to the American public about the upheaval. Buffett pointed to First Republic Bank, the insolvent bank which last weekend was acquired by JPMorgan after it collapsed after offering jumbo, non-government-backed mortgages at fixed rates that were interest-only for 10 years in some cases — which Buffett called “a crazy proposition.”… “It was doing it in plain sight and the world ignored it ‘til it blew up,” Buffett said.

  17. BiW

    Thanks, I understand. Which is not a problem of FRB in itself, but of the activities the bank’s directors get up to in managing it. Ie, it works perfectly well for boring Retail Bank to do FRB (to a conservative capital ratio), offer virtually safe deposits (because liquidity will always be there providing it’s solvent) and job done. I had understood this to be an attack on the concept of FRB itself, which clearly I had misunderstood.

    I can think of solutions to the problems of ambitious directors (#), but that’s an alternative discussion to FRB.

    100% FRB could be relatively simple. Revert to paying the wages in cash (for those that desire), and then let the recipient freely decide what to do next…

    Whatever the regs on proscribing capital ratios etc, how about banks not allowed to market their investments (current accounts, whatever) without always including in the respective advert/marketing material their latest key ratios in a prominent position, compared with what the industry regards as a safe target (or provide ranges for safe to less safe?), such as capital ratio etc. With movements over the last 4 quarters. The info is all there, hence there is next to no additional administrative cost. Help inform Joe at every turn. Might focus the minds of a few lunch-drunk directors? I’m sure there could be a myriad of other / better ways to achieve similar?

  18. “If I understand Jim’s position correctly, the problem is when banks take the “profitability” directive too far and begin to consider themselves Masters of the Financial Universe with ever-crazier financial engineering which will of course never come crashing down.

    And when it does come crashing down it’s eventually the small depositors that suddenly can’t pay their bills from their current accounts, and the taxpayers picking up the costs with those Masters riding off into the sunset with their ill-gotten gains intact.

    If depositors could (or should, whatever the details) keep their day-to-day cash in a secure, boring, 100% reserve bank, presumably for a small service charge, then the Masters could do what they want with the investment cash from sophisticated investors pushing out along the risk curve for a better return – without, importantly, any need of taxpayer guarantees.”

    Pretty much spot on.

    The Masters of the Financial Universe are using Joe and Josephine Public as human shields in effect. They know the State will never let the whole payments system that everyone uses on a day to day basis go under, and thus they can use all the current account money to do what they like with, safe in the knowledge the State will always bail them out when they’ve screwed up.

    In my system the day to day 100% reserve payment banks would be completely separated from the FR investment banks. If an investment bank goes under that does not stop the payment banks continuing to operate. People’s current accounts and savings held in the payment banks would be untouched by a financial crisis. Bank failures would be for rich people to worry about, not the broad mass of the public who live pay cheque to pay cheque, nor would it need the taxpayer to step in all the time to protect the entire system. If an investment bank went bust then it would be wound up as FRBs are today (except they very rarely are, because they get bailed out instead) – shareholders lose first then bond holders, finally depositors take a haircut if needed.

    Of course in my system there would be a powerful incentive not to indulge in casino capitalism, because with 100% reserve banks sitting just across the street from them, any investment bank that starts to look a bit iffy would soon have a bank run and all their deposits would migrate to the safe banks, and they’d be bust. So there would be an overwhelming need for the investment banks not to take excess risks, and be seen to not be taking excess risks.

  19. “Then I’m entirely struggling to see what the problem of FRB is. The important thing for the bank being profitability”

    FR banks can be stunningly profitable, just up to the point when they aren’t. See the GFC as a classic example. Everyone was lending money to people to buy houses for stupid prices, zero deposit and 110% of asset value, fixed teaser rates that would then become floating higher ones. And ‘everyone’ thought this was just fine, from Alan Greenspan downwards, because house prices only go up right? I remember reading a serious article in the press in about 2006/7 where someone was predicting that average house prices would be double what they were then in just a few years, because they go up 10% every year!

    Human beings are fallible. They get caught up in manias all the time. The financial system should be designed such that it can’t get caught up in such behaviour. The current universal FRB system not only does not protect people from themselves, it exacerbates the problem.

  20. “FR banks can be stunningly profitable, just up to the point when they aren’t. See the GFC as a classic example.”

    But that’s the problem. Assessing asset value / risk is a crucial element of profitability / safe cover. Giving 110% mortgages to those who in any case couldn’t even afford the repayments was anything but stunningly profitable, if assessed properly. Hence, that wasn’t a problem of FRB, more a problem of incompetence and/or fraud.

    It’s interesting. I understand you want a solution, I guess I’m not convinced that “(safe) banks that in essence can’t lend” provides the most beneficial answer? I’m not even sure how (safe) Bank A can accept Joe’s electronic transfer from an unsafe bank (the transaction immediately creates a intra-bank loan, due to bank A from unsafe bank, to counter the balance now due to Joe?) but I guess that’s a technicality to be worked out.

  21. “But that’s the problem. Assessing asset value / risk is a crucial element of profitability / safe cover. Giving 110% mortgages to those who in any case couldn’t even afford the repayments was anything but stunningly profitable, if assessed properly. Hence, that wasn’t a problem of FRB, more a problem of incompetence and/or fraud.”

    Exactly. And under FRB the desire of any individual bank to make money can translate into behaviour that is systemically dangerous. One bank offering 110% mortgages is not dangerous, all of them doing so is. Now I suppose you could impose more regulations onto banks as to what criteria they can lend on. Multiples of income. Percentages of asset values, that sort of thing. But even that wouldn’t have stopped the SVB failure – that was a failure of investment strategy/oversight. The loans they made were (I think) fine. They had too much money to actually loan out so parked it in US Treasuries which then went down in value.

    I still think its necessary to separate the current account banking system from the investment/saving banking system, so that when the latter fails it doesn’t impinge on the former. How that is done in a technical sense is above my pay grade, but given the entire banking system we have today is a legal fiction (its not based on natural laws like gravity, or the weather) we can create any banking system we want.

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